Demystifying Statutory Valuation and Start Ups | Methods and Market Approaches

By Niki Shah – Partner | SN & Co.

Table of Contents

1. Introduction
2. Start-Up Valuation
3. Statutory Valuation
4. Valuation Process – Key Steps
5. Valuation Process – Approaches
6. Market Approach

1. Introduction

1.1 What is Valuation?

New Trends in Business Environment

1.2 New Trends

• Business for Valuation v/s Profit
• Increase in Serial Entrepreneur
• Is it only Numbers?
• Eternal Truth – Value is in the eye of buyer (Logistic Co)

1.3 Good Valuation = Story +Numbers 

Appeal

• Numbers provide a sense of control, a sense of precision and the appearance of objectivity.
• Stories are more  easily remembered than numbers and connect with human emotions.

Dangers

• Without narratives to back them up, numbers can be easily manipulated, to hide bias or intimidate those not in the loop.
• Stories that are not anchored to or connected with numbers can veer into fairy tales leading to unreal valuation.

1.4 Valuation at Each Stage

Development Stage

• Ideation
  Media Co, Mysa, BYJU’sBYJU’s unique teaching style the idea of creating a digital platform for students. It’s valuation was relatively low, now the company has a valuation of over $16 billion
  

• Minimum Viable Product/Prototype
  Agri, InstagramInstagram MVP focused on making it ease for users to taking and sharing photos quickly. It’s valuation was $1 billion when acquired by Facebook and now it’s in the range of $100 billion.

• Traction
  Health, DropboxDropbox service gained traction due to its simplicity and ease of use. Users can upload files from their device to the cloud, and access them from any device. Dropbox was valued at $9.2 billion and at the time of its IPO was around $8 billion.

2. Start-Up Valuation

2.1 Traits/Challenges Faced by Startups

• Limited History and Fierce Competition
• Financial Challenge to raise capital
• Small or no revenues and negative operating
• Illiquidity of Investments
• Focus on Intangibles – Value of the tech business ideas or technology under development or an innovation
• Unique product/Strategic business model and feasibility study is important
• Success ratio – Most don’t survive the test of commercial success and fall

2.2 Examples of Startups

2.2.1 Product

Success depends on consumer need and right vision:

E.g.- Zoom’s valuation increased from around $1 billion in 2017 to over $100 billion in 2021. Zoom’s video conferencing platform was easy to use and reliable, with features that made it popular for remote work and virtual events.

Price

Demands Constant Innovation, Evolving model, Pricing and Scalability:

E.g.- Airbnb‘s valuation increased from around $1.3 million in 2009 to over $100 billion in 2021. Airbnb’s pricing was often cheaper than hotels, especially in popular tourist destinations.

Place

Aggressive expansion plans and marketing strategies leads to a successful startup

E.g.- Uber‘s valuation increased from around $5.9 million in 2010 to over $70 billion in 2021. Uber’s app was available in multiple cities and countries around the world, making it easy for travellers to use the service wherever they went.

2.3 Popular Methods of Startup Valuation

Methods of Valuation would depend upon the stage of the Company

• Asset Approach – ReplacementCost
• Income Approach – Discounted Cash FlowMethod
• Market Approach – Comparable Companies/transaction
• Venture CapitalMethod
• Chicago Method

3. Statutory Valuation

3.1 Purpose of Valuation

3.1.1 Regulatory Compliance

Companies Act, 2013

• Internationally accepted Valuation Methodology
• Valuation Standards adopted by any RV  organisation

FEMA, 1999/Reserve Bank of India

• Internationally Accepted Pricing Methodology

Income Tax Act, 1961

• Discounted Free Cash Flow Method
• Net Asset Value Method as per Rule 11UA

SEBI, 1992

• SEBI Guidelines

IBC, 2016

• Internationally accepted valuation methods

Financial Reporting

• IFRS/IndAS
• Purchase price allocation (PPA)
• Fair valuation of tangible and intangible assets or Instruments
• Asset impairment

Commercial Valuation & Fairness Opinion

• Merger andacquisitions
• Private equity placement
• Joint Ventures
• Corporatere structuring (swap ratio)

Internal Reporting Requirements

• PE funds portfolio valuation
• Internal management analysis

3.2 Bird’s Eye View

3.3 Applicability at a Glance

 SEBI laws includes many rules and regulations which prescribes merchant banker to carry out valuation, however recently those are amended to recognize registered valuer (as per Companies Act,2013)

3.4 Registered Valuer Rules

4. Valuation Process – Key Steps

Steps of Valuation as prescribed by ICAI Valuation Standard

• Define the valuation base, premise of the value and valuation date
• Analyze the asset to be valued and collect the necessary information
• Identify the adjustments to the financial and non-financial information for the valuation
• Consider and apply appropriate valuation approaches and methods
• Arrive at a value or a range of values

5. Valuation Process – Approaches

6. Market Approach

Calculation of Market/ Transaction Multiple

* Base for Sales, EBITDA, Earnings, Net worth could be:

• Most recent financial year(Current)
• Last four quarters (Trailing)